Can Big 5 Sporting's Initiatives Aid Stock Amid Margin Woes?

Big 5 Sporting Goods Corporation BGFV is grappling with strained margins since the past few quarters now. This, in turn, is weighing on the company’s bottom-line performance. Consequently, the company incurred a loss in four of the trailing five quarters, including fourth-quarter 2018. Soft hard good category due to persistent weakness in the firearm-related products is an added concern.

These factors have also hurt investors’ sentiments as evident from the company’s share price performance in the past six months. Notably, this sporting goods retailer has lost 38.9% against the industry’s 12.4% rally.

Let’s Delve Deeper

Big 5 Sporting recorded the fifth straight quarter of gross margin contraction now. In the most recent quarter, gross margin contracted 150 basis points, reflecting lower distribution expenses due to decline in inventory levels coupled with a slight contraction in merchandise margins. Additionally, the company incurred an operating loss of $5.9 million compared with $7.9 million in the year-ago quarter.

Although Big 5 Sporting’s comparable store sales (comps) edged up 1.1% in fourth-quarter 2018, it has been reporting soft comps in the previous quarters, mainly due to sluggishness at the hard good category. In the fourth quarter, comps fell in low-single-digits at this category. The metric also declined in low-single-digits in October and November but increased in mid-single-digits during December. Markedly, the company’s top line has lagged estimates in four of the last seven quarters, mainly due to soft comps.

While these concerns make us apprehensive about Big 5 Sporting’s performance, its efforts to expand store base and introduce technological advancements for improving services bode well. The company has also been undertaking initiatives to expand its production scale and drive traffic and sales. Currently, it is testing the pricing strategies to achieve the optimal balance between driving sales and maintaining margins. In 2019, Big 5 Sporting plans to open about five stores and close four.

Moreover, the company is changing its advertising cadence and structure for lending more flexibility to diversify its marketing efforts across the print and digital platforms. Also, it has been reinforcing the value proposition to help improve its competitive position. These apart, management remains focused on managing the cost structure, including efforts to lessen increased wage pressures, to boost margins and profitability.

Big 5 Sporting’s disciplined capital allocation strategy is also impressive. In 2019, management expects capital expenditures of about $12-$16 million compared with $15.5 million incurred last year. This amount will be spent on store-growth efforts including opening, remodeling, distribution centers as well as investments in the IT systems. Also, it declared a first-quarter 2019 cash dividend of 5 cents a share, paid on Mar 22.

Wrapping Up

Even though Big 5 Sporting is making efforts to lift margins and profitability, the afore-mentioned hurdles cannot be ignored. Also, the company’s positive comps trend in the fourth quarter is likely to continue, evident from management’s projections. Comps are projected to grow in the mid-single-digit range during the first quarter of 2019 versus a 7.5% decline in the year-ago quarter.

It is also imperative to mention that Big 5 Sporting’s fourth-quarter 2018 top and bottom lines matched the Zacks Consensus Estimate. Also, the company’s adjusted loss of 16 cents per share compared favorably with a loss of 62 cents per share incurred in the prior-year quarter. Impressively, sales improved year over year growth on higher comps and gains from favorable winter weather across majority of its markets. Moreover, the company witnessed a marginal rise in customer transactions and average sale during the quarter.

As a result, management issued a bullish earnings view for first-quarter 2019, which raises confidence. Quarterly earnings are envisioned to be 4-10 cents per share against a loss of 6 cents incurred in first-quarter 2018. The Zacks Consensus Estimate for the first quarter is pegged at 8 cents.

These tailwinds might bring this Zacks Rank #3 (Hold) stock back on the growth trajectory in the coming months.

Three Better-Ranked Stocks in the Retail Space

Abercrombie & Fitch Co. ANF has an impressive long-term earnings growth rate of 15.3% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hibbett Sports, Inc. HIBB has delivered a positive earnings surprise of 50% in the last reported quarter. The company carries a Zacks Rank #2 (Buy).

Sally Beauty Holdings, Inc. SBH is a Zacks Rank #2 stock, which has delivered an average trailing four-quarter positive earnings surprise of 3.1%.

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Abercrombie & Fitch Company (ANF): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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